Bank of Canada warns on loonie's rise

Thu Jun 4, 2009 10:19am EDT
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By Louise Egan

OTTAWA (Reuters) - The Bank of Canada held its key interest rate unchanged on Thursday at 0.25 percent, as expected, but sent a shot across the bow of currency markets with unusually strong comments on the threat posed by the sharp appreciation of the Canadian dollar.

The central bank reaffirmed its pledge to hold rates where they are for another year. It made no mention of unconventional monetary easing, such as printing money to buy securities, upholding its view that further stimulus is not required any time soon.

It made note of recent significant improvements in financial conditions and commodity prices and a modest recovery in consumer and business confidence.

But the bank said all of that could be lost if the Canadian dollar -- which rose 9.3 percent against the U.S. dollar in May -- continues to rise.

The dollar climbed to an eight-month high around C$1.08 to the U.S. dollar, or 92.5 U.S. cents, earlier this month, before settling around C$1.1050, or 90.5 U.S. cents, on Thursday. It weakened slightly on the Bank of Canada announcement.

"If the unprecedentedly rapid rise in the Canadian dollar (which reflects a combination of higher commodity prices and generalized weakness in the U.S. currency) proves persistent, it could fully offset these positive factors," the bank said.

Economists had anticipated a comment on the currency by the central bank, but few thought Governor Mark Carney would go so far in his verbal intervention, especially since he has been reluctant to judge the currency's value in the past.

"It's a bolder comment than I would have expected...By central bank language that's a pretty bold acknowledgment of the downside risks that appreciation poses to the Canadian economy," said Derek Holt, economist at Scotia Capital.   Continued...

<p>The Bank of Canada building is pictured in Ottawa March 3, 2009. REUTERS/Chris Wattie</p>